The case for taking an ‘outside view’ in Gold Cup week

Ahead of the Cheltenham Gold Cup, you will have to look elsewhere for racing tips – here we will simply remind you that value investing is all about looking to keep on the right side of the averages


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Among the favourites to win the 2019 Cheltenham Gold Gup, which sets off at 3.30pm today, is last year’s winner Native River.

At around 4/1 with the bookmakers, at the time of writing, the Irish-bred eight-year-old is clearly well-fancied to repeat last year’s achievement and yet, in backing him, his followers are betting against history.

In the almost 100 years since the race has been run over fences, only six horses have won the Gold Cup twice or more in succession – Easter Hero and L’Escargot (twice each), Arkle, Best Mate and Cottage Rake (three times each) and, well out in front with five consecutive successes between 1932 and 1936, Golden Miller. (For trivia fans, he is also the only horse to win the Gold Cup and Grand National in the same year – 1934).

One horse most pundits – and punters – expected to pull off the feat 30-odd years ago was the great Desert Orchid.

Having won the Gold Cup as the favourite in 1989, however, he set off a year later even more heavily fancied – at 10/11 on – only to finish third as the 100-1 shot Norton’s coin became the longest-priced horse ever to win the race.

That is reminiscent of another horse-racing upset we have mentioned before, here on The Value Perspective – when Big Brown failed to capture the third leg of the US version of the Triple Crown in 2008.

Having won the Kentucky Derby and Preakness Stakes, Big Brown was considered a ‘dead cert’ to win the Belmont Stakes but ended up finishing last to a 38-1 long-shot.

Expect the unexpected

Each time these upsets occur, the racing world appears stunned but should it be?

After all, if it were that easy to win the Triple Crown, it presumably would have happened more than once in the last 40 years (American Pharoah in 2015).

Yet people become swept up in current events – be it horse races or financial matters – and grow more and more convinced something will happen even though history suggests it almost never does.

Michael Mauboussin, one of the great thinkers of value investing, has written on this subject on a number of occasions – including in the context of Big Brown.

He argued the failure of most people to consider how successful other horses had been when they were in Big Brown’s position illustrates a bias among human beings against the broader, more fact-oriented ‘outside view’ and towards the so-called ‘inside view’.

This involves making predictions based on a narrow set of inputs, which may include anecdotal evidence and misperceptions.

One classic financial example Mauboussin points to is the way company managements are always convinced any acquisition they are planning will add value even though history suggests some two-thirds of all such deals do not make the hoped-for return.

Nor should fund managers believe they are immune – after all, every professional investor is convinced they will outperform their benchmark index even though the cold statistics show that, over three years, the average unit trust fund manager does not.

In which case, you might reasonably ask, what makes us believe, here on The Value Perspective that we will outperform in the long run if the numbers suggest otherwise?

Learning lessons

To offer one answer, every January we look to see what lessons we can learn from the previous year’s investments.

We analyse what we did right in our portfolios – and what we did wrong – and, while the great majority of people would say that all comes down to what made and lost us money, the great majority of people would be completely wrong.

For us, the right lesson to take from the process is, if I took a particular decision 100 times, would I make money on average?

As value investors, we want to make investments that make us money 60 or 70 times out of 100.

As such, if a particular course of action turns out to have been one of the times we lose money, the lesson is not ‘never do that again’ but ‘just keep doing it – over and over and over’.

That, in essence, is what value investing is – a set of rules that helps to keep you on the right side of the averages so that, instead of being caught out by your own emotions – how ‘likely’, at the time, you believe any event is to happen or decision is to play out – you put yourself in the best possible position to exploit the emotions of others.


Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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